Importance of Supplier Relations Management

Chapter 1: Introduction

1.1 Objective

“Supply chain management (SCM) is the combination of art and science that goes into improving the way your company finds the raw components it needs to make a product or service and deliver it to customers.(Worthen., 2008)”.

The main objectives of this research are to structure a supply network through multiple tiers. It extends in identifying the importance of Supplier relations management. Today’s market as we know is customer driven, with extensive subcontracting, Inventory and supply chain management can make or break a deal. Good supply network emphasizes on seamless integration between Original Equipment Manufacturer (OEM) and its suppliers. It encourages in merging its design of Product, process and services. Regard to today’s world, Global Supply chain Management is changing virtually every day (group, June 2006 ) Large and Small companies are keen and very likely to trade internationally and also to take advantage of low cost country’s for their sources. (group, June 2006 ). This study takes a more holistic approach in identifying issues and constraints of global supply chain management. A very rigorous approach for optimally coordinating information, material and financial flow between supplier tiers is another objective of this study. Study is supported by mapping different models and approaches in order to provide a harmonic coordination within a closed supply network. As mentioned earlier small and large companies are turning their interest towards low cost developing countries for sources, this research intends to study current trends and opportunities among these developing nations for sustainable supply network coordination.

Chapter 2 Literature Review

2.1 Summary

This paper revolves around various objectives as discussed earlier. The purpose of a literature review is to describe the work that has been reported on a topic. It illustrates an individual’s ability to identify vital information and sketch existing knowledge. This literature review is carried out to review current market trends and also to have a thorough knowledge correlating our main objectives. Ideas and thoughts of different authors has been analysed to demonstrate a more eccentric review of the topic. Few case studies has also been analysed to understand practical difficulties and competitive advantage of a better supply network design. Table 1 illustrates various definitions proposed by authors.

2.2 Multi Tier Supply Chain

Overview and key elements

In general many Manufacturing Organizations are a network production and distribution sites. They transfer raw materials to finished products and supply it to end users (billington 1992). Strategic supply chains are those in which “members are strategically, operationally, and technologically integrated”(Hult 2004) and are assumed to be a long-term stable relationships with a potential to change in accordance with the variable demands and market conditions(Hult 2004).

Inventories play a very important role at both macroeconomic and microeconomic levels (Jaber 2009). According to (Jaber 2009), Current inventory costs accounts to half of total logistical expenses of a supply chain(Lancioni 2000). Improper Inventory management in a supply chain usually tends to increase conflicts between entities of the supply chain i.e., between retailer, buyer, manufacturer and suppliers, which may result to inefficiencies of the supply chain.(Jaber 2009).

In a ideal supply chain every firm is considered to be unified, thus in an ideally integrated supply chain, end users or ultimate customers are the pulling force of a value chain unlike classical way of Manufactures pushing the goods out(Tan 2001). Realistically achieving full integration of a value chain is difficult with its complexity, thus strategically important business organizations are emphasized (Tan 2001). Key elements and activities of supply chain are as shown below.

Key Elements Of supply chain

According to (Christopher 2005), One important aspect of effective SCM is to reduce or completely eliminate Inventory issues between different entities/Organisation in a supply chain. He suggests eliminating this issue by effective information sharing of all stock levels. This concept is called ‘Co- Managed Inventory’ CMI.(Christopher 2005).(Tan 2001) Suggest that primary focus of a SCM is to achieve efficient end product distribution from manufacturer to customer by replacing inventories with information. Supply chain management’s philosophy also suggests that its operations are not concerned only with logistics, but expands through all other operations of an organisation to achieve a greater customer satisfaction and value.(John T. Mentzer 2001).Other basic characteristics of a SCM, according to (John T. Mentzer 2001) are

• Considering the whole supply chain as a single entity and by this virtue, total inventory flow is managed in a SCM.
• Orienting Intrafirm and interfirm operations with a strategic approach and thus reinforcing its capabilities by co-operative measures.
• Unique/Personalized approach should be carried out for every customer to stay competitive and to achieve better customer satisfaction.

For years Supply chain was considered as channels for distribution. The main intent of channel distribution was to make each organisation more productive and efficient. It emphasized on making each organisation more profitable without considering its other counter parts of the channel, i.e. like Tier1 suppliers, tier2, distributors or retailers (Lancioni 2000). Over the years with the advent of Supply chain management, focus drifted from intrafunctionaltowards a more interfunctional vision, by which co-ordination between these entities of SCM was emphasised. Interfunctional Channel distribution or termed as the modern day supply chain management considered the opportunity in supply network coordination: “. . . altering the levels of the various activities, often referred to as logistical in nature (such as transportation, inventories, facility location, and order processing) may adversely affect achieving the objectives of these other functional areas”(Lancioni 2000). Thus customer becomes the driving force of supply chain management.

Supply chain analysis (SCA) deals with vertical inter dependencies between the firms; it also requires a systematic approach towards resource allocation and information exchange at every stage of production (Simchi-Levi 2000).

Globalization represents cross-border flow of finished goods and increase in global competitors, identifying opportunities and competitive supply chain within its industrial sector(John T. Mentzer 2006). Realistically Supply-chain Managers identify difference between a domestic and a global supply chain even if the conditions are same. It is found that complexity’s designing Global supply chain is exponentially high compared to a domestic supply chain, also its ability to stay competitive lies in understanding subtleties of GSCM that exists only during cross border trade offs(John T. Mentzer 2006).

Supply chain distinguishes itself from its constituent entities with its integration of operations (Mahapatra 2004). Supply chain management goes beyond co-ordination among firms; it recognises inter dependencies among them and also delivers effective relationship management.

Logistics is an integral part of effective supply chain.(Pierpaolo Pontrandolfo 2003) Suggest that Logistics operations within an organization can be related to

• Forward flow of goods both WIP and Finished goods
• Information flow feedback
• Management and Control

Network Analysis (NA) is a technique which provides many tools to map relationship between internal organisations. NA also concerns with horizontal dependencies unlike SCA (Sergio G. Lazzarini 2001). As SCA and NA there are many other analyses methodology’s suggests the importance of Interdependencies between organizations,

According to (John T. Mentzer 2001) , the following activities are necessary to implement a better SCM.

• “Integrated Behaviour
• Sharing risks and rewards mutually
• Co-ordination
• Mutual sharing Information
• Goals and focus to serve customers
• Process integration
• Installing Long-term relations with suppliers and customers”(Mentzer 2001).

The term supply chain management had an increased influence over the past decade. For instance, Annual Conference of the Council of Logistics Management 1995, 13.5% of the conference sessions posted titles concerning the words “supply chain.” At the 1997 conference, just two years later, the number of sessions about the terminology drastically increased to 22.4% (John T. Mentzer 2001). This increase has been steady all these years. This increase widely illustrates the global importance and benefits of Supply chain management. There are different types of channel relations in a supply chain as illustrated in Fig4.

Supplier Organization/OEM Customer

Figure3a: Direct Supply Chain

Supplier’s Supplier Organization Customer’s

SupplierCustomer

Figure 3b: Extended Supply Chain

Third party

Logistics Supplier

Ultimate Supplier Organization Customer Ultimate

Supplier Customer

Financial Market

Provider Research

The figure1 identifies different degrees of supply chain complexity they are direct, extended and ultimate supply chain. A direct supply chain consists of a supplier and a customer involved in upstream and downstream flow of (Products, services, finance and information)(Figure: 4a.)(John T. Mentzer 2001) Similarly an extended supply chain includes suppliers, Immediate suppliers and customers and immediate customer, all involved in the upstream and/or downstream flows of products, finances, services and info(Figure: 4b). Thus an ultimate supply chain includes all the organizations involved in all the upstream and downstream flows of products/services/finances, and information from the ultimate supplier to the ultimate customer. (Figure: 4c) illustrates the complex functions of an ultimate supply chains. This may include 3rd Party Financial institutions; this involvement may be a cause to reduce overall risk involved. Similarly Even logistical operations are also supported by (3PL) In figure:4c , a market research firm is also seen as an entity of this complex chain. These may very well support the Manufacturer by providing vital market information about their end users.(John T. Mentzer 2001).

Process of Supply chain management

Many organisations believe that with process approach it is difficult to reduce/optimize their production flow in SCM (Cooper 2000).

Customer relationship management

• Customer service management
• Demand management
• Order fulfilment
• Manufacturing flow management
• Procurement
• Product development and commercialization
• Returns.

Multi Levels Explained

It is necessary to understand different network analysis, methodologies to understand and resolve issues in designing a better supply chain management.

Fig2 illustrates a basic model of a multi tier supply chain. Each level has its own importance and prominent influence over the chain thus making every level an integral part of the complex system.

Fig2 is a sceptic of four level supply chain with centralised decision process. The different levels are as described below(Goyal 2009)

First level-This Level of supply network contains multiple buyers/Distributor.

Second Level- This level encompasses of Vendors or Manufacturer ie., Original Equipment Manufacturer.

Third level- This level contains Tier-1 /Immediate Suppliers of the supply chain.

Fourth level- This level contains different tier 2 suppliers. These suppliers support tier1 suppliers or directly to the manufacturer by providing product, service or finance.(Goyal 2009).

Levels of issue

The major issues at different levels that have to be addressed in a multi dimensional Supply chain are(David Simchi-Levi 2003).

• Strategic level: Strategic level of decisions are vital which provides and long and sustainable effect on an organization. Major decisions like factory location, storage, Plant capacity and logistic network fall under this level.
• Tactical level: These decision that change steadily(eg: every quarter) depending on market position, like transportation, production capacity, inventory policy, customer review etc.,
• Operational level: These decisions are mostly day to day like scheduling, lead time, quotes, routing etc.,(David Simchi-Levi 2003).

According to (David Simchi-Levi 2003), the above issues can be addresses with few strategies as follows

• Distribution Network Configuration
• Inventory Control
• Supply Contracts
• Distribution Strategies
• Supply Chain Integration and Strategic partnering
• Outsourcing and Procurement Strategies
• Product Design

Contrastingly other author(Simon Croom 2000) looks to analyse supply chain management as different levels as addressed below.

• Dyadic Level: This level considers just two party relations, like Supplier-Manufacturer or Supplier-Retailer
• Chain Level: This level composes of relations with different dyadic levels, relations with customer-manufacturer-supplier-distributor-retailer etc.,
• Network Level: This level is concerned with all network operations like upstream and downstream flow.(Simon Croom 2000).

Areas of concern for Supply chain Literature

Figure 6: Principle component bodies of supply chain literature Source: (Simon Croom 2000)

2.3 Global Supply Chain Management [GSCM]

In this decade of global exploitation for raw materials, cheap and skilled labour has impounded interest towards global supply chain. Fig6 illustrates a typical Global Supply chain network.

Interfunctional characteristic of a value chain has grown more complex and non feasible. Manufacturers usually set up factories in foreign to take advantages of low cost labour, trade concession, reduced logistic expense for foreign market, subsidies in capital investment it also makes manufactures more reliable to customers due to their close proximity(Gargeya 2005).Greater needs for GSCM is debated in this chapter below.

Authors debate of many learning methodologies to understand framework of Global Supply chain management (GSCM). According to (Pierpaolo Pontrandolfo 2003) GSCM issues can be understood by an Artificial intelligence approach called Reinforcement learning (RL). Currently there are many such frameworks, helping different Multi National Company’s as a business model.

(Barry 2004), describes “An enterprise may have lowest over-all costs in a stable world environment, but may also have the highest level of risk – if any one of the multiple gating factors kink up an elongated global supply chain!” In a global supply chain, supply risk should be identified, asses its possible occurrence and provided with a monetary value for better understanding, Company’s should easily modify towards alternate suppliers (Barry 2004).

2.3a Current State Issues

However experts believe that Global supply chain are more complex and difficult to maintain unlike domestic SC. Transportation cost tend to increase substantially due to foreign location, also complicates decision making because of increased lead time(Gargeya 2005). The other factors that don’t encourage Global supply chain are listed below (Gargeya 2005)

• Inventory Cost Trade offs
• Supplier availability and Quality
• Different Language, Culture, practices
• Difficulties in Material planning and demand forecast
• Infrastructural incapability and non sophisticated telecommunication
• Inadequate skilled labour, Technology and Equipments
• Uncertain exchange rates
• Instable economics and politics
• Inconsistency of financial performance of supply chain.

Efficient product and service distribution to upcoming markets can only be provided if an effective marketing infrastructure is developed.(Richey 2001). Globalization process should be viewed as a network embedded with contemporaneous options, constraints and events(Richey 2001). It intends to look into developing a strategic supply chain development and implementation.

One of the challenge in a Global supply chain is development of a decision making model which incorporates almost every concerns of entities running across the chain(Mahapatra 2004). It is one of the biggest concerns to produce effective decisions to reduce risk. Considerable efforts has now been expended in developing this model, many conventional methodologies are adopted like, Simulation, Mathematical program, statistics etc., (Mahapatra 2004).

2.3 b Emerging Issues

Numerous Global Supply chain models have been proposed consistently by researchers to tackle issues. Diffusion in multiple plant production systems, globalized market has escalated researcher’s interest towards this field. Fig11 illustrates one of the models that help to design a supply network. This model proposed by authors “Carlos J. Vidal” and “Marc Goetschalckx” illustrates an overlook of a decision making model to tackle transfer pricing and transport cost allocation problems. It is seen from fig6 that the suppliers are broadly classified as internal and external suppliers. For External suppliers it is clear that there is no possible decision for transfer pricing because they directly sell to organizations at market prices. Unlike external suppliers an optimal transfer pricing is determined using the model for internal suppliers (Goetschalckx 2001). A detail literature review of transfer pricing issue and its effect on Global supply chain will be discussed later in this chapter.

Table 2: Major international issues considered in selected global supply chain models Source: (Goetschalckx 1997)

Market place around Global supply chain is changing continually reflecting to more emerging issues. These issues have to be resolved in a very short span to stay competitive and to make supply chain more financially effective (Gargeya 2005). First issue is dramatic increase of organizations, outsourcing its work to both domestic and international locations. Secondly many industries outsourced with a unidirectional and enterprise level motive, but now strive to coordinate its decision process across different levels of suppliers (Gargeya 2005). Third issue is recent development in the field of supply chain resulting in expanded definition of “supply chain performance, as mission, strategy and objectives can vary considerably based on value of the product offered to the customer” (Gargeya 2005).

Even with extreme significance and necessity for Global Supply chain management, the subject is complex and diffuse. Many technique and methods have emerged from different areas like operations, logistics, sociology, International relationship, marketing, management, economics et,. But still due to its significant growth and complexity it becomes hard to keep abreast with current development in the field of GSCM (John T. Mentzer 2006). Cementing is the fact that many of these methodologies has evolved with little interdependency, considering little attention in relating with existing models (John T. Mentzer 2006).

Outsourcing and Global Supply chain management focus to cost reduction, improved quality; thus increasing its overall competitiveness through structure and process that increase managerial commitment and competencies (Richey 2001). On other hand increased outsourcing of manufacturing to foreign locations in recent years has influenced mangers to design their supply chain considering not only in-house facilities but also to incorporate supplier capabilities and infrastructure. Broader criteria are taken into account while selecting the suppliers unlike fundamental ways. Suppliers are chosen based on customer’s perception of suppliers to meet demand, with suitable attributes such as quality, quantity, delivery, service, price etc.,. In some case more broader criteria as defined by total ownership cost for carrying inventory, training and repair (Meixell 2005). Supplier selection escalates structure of design problems with limitations in number of vendors in a certain geography, minimum order quantity, geographic preference and supplier capacity (Gargeya 2005).

Supply network integration through a supply chain also influences Global supply chain design. Business process integration is one of the best options, coordinating decision across multiple tiers of suppliers/vendors. In reality organizations engage in coordination activities like “Vendor Managed Inventory (VMI), Collaborative Planning, Forecasting, and replenishment (CPFR)” (Gargeya 2005) by sharing sales promotion information. Advanced planning system (APS) integrate production decision making process, these systems are designed with precautions having Supplier capacity and Inventory in mind. These constraints influence Global Supply chain design in large scale (Gargeya 2005). As part of global supply chain design many factors like import duties has to be designed while framing since they contribute nearly 5-10 % of total cost (Pierpaolo Pontrandolfo 2003).Thriving through these issues, a well-coordinated and integrated design of Global Supply chain is hard to replicate thus making is very efficient and helps to achieve a competitive strategy in global scale (Gargeya 2005).

2.3c Need of Global Supply chain Management: Market Drift

Global Supply chain models are complex and difficult to provide a solution compared to a domestic supply chain. In a global supply chain flow of cash and information is difficult to maintain unlike single country model. Inclusion of various taxes, Transfer pricing, duties, exchange rates, trade barriers are basic necessity to instil a real time supply system (Goetschalckx 1997).

Today’s market has advanced with increased globalization of supply sources and demand, drastic improvement of information transparency, innovative business models and venture capital. With such high competitive nature, Simple pursue for higher market share is no longer effective in improving profitability. Focus has drifted towards redefining their competitive profit zone; Companies now tend towards co-relationship to capture life time customer rather than mass buyers through strategic development and Management partnership (John T. Mentzer 2006).

Global Market has immensely changed in these following factors

• Increase value of end users over mass buyers
• Importance of customization
• Emerging global consumer segment
• Time and quality related competition
• Improvements in communication
• Value for Information sharing
• Changing government policies

Power shift to End users

In broad spectrum of supply chain power has shifted towards End users. Customer satisfaction becomes the ultimate goal. Interfirm relation and collaboration is critical to increase customer satisfaction.(John T. Mentzer 2006). Original equipment manufacturers and supporting suppliers should be quick to react to customer requirements or else have to face prospect of losing market share.

Mass Customization

Mass customization results in increase in variety without compromising quality, price and efficiency i.e., customers expect better quality level and customization for low or competitive cost. This level of customization can only be achieved with full commitment of every entity of a supply chain like employees, distributors, suppliers etc,(John T. Mentzer 2006).

Improved Communication

Global competitive market means unit of business analysis of an organization is whole world not just a country/region. Communication revolution has offended late design or delay in delivery. In this context, “Kotler Philip” said “As firms globalize, they realize that no matter how large they are, they lackthe total resources and requisites for success.Viewing the complete supply chain forproducing value, they recognize the necessity of partnering with other organizations(John T. Mentzer 2006) “.

Time and Quality importance

Time and Quality focused market competition can be achieved by basic Lean methodologies, reducing waste in the form of time, defects etc,. Improved quality not just means finished goods but also every area of a company.(John T. Mentzer 2006)

Information Technology Influenced

Most Powerful and conceptual influence is through immense improvement in the field of Information technology. Invention of modern computers superseded monolithic companies. Fast communication increased link between every member also eliminating multiple layers of people serving as information channel and control group, reducing cost and improved linkage eliminating time delays(John T. Mentzer 2006).

2.3d Benefits of Global Supply chain

In this competitive world, market research is a fundamental aspect of any organization’s design process. Anticipated results are an aspect of a design process, so it is necessary to understand possible benefits of Global Supply chain.

Few benefits described by (Mechanic 2010), are

• Highest standard of quality.
• Increased standard expectancy from developing nations.
• Reduced Inventory and Transportation.
• Competitive advantage.
• Make or buy decisions simplified.
• Wider marker scale to target (New Market opportunity).
• Opportunity to learn and adapt business models around the globe.
• Increase in Supply chain flexibility.
• Surviving Economic recessions with auxiliary markets.

2.4 Supply Network design and collaboration

2.4 a General literature

According to (Sheng Su 2008)”A supply chain is an integrated network of suppliers, transformation plants and distribution channels which are organized to acquire raw materials, transform the materials into final products, and deliver those products to customers(Sheng Su 2008)”.

Recent developments in technology have forced typical sequential manufacturing industry into designing current ideas for business-business relationship with companies in supply networks (james B. Rice Jr 2002).

(james B. Rice Jr 2002) Suggest that, Organizations which are looking for coordination across a strategic supply chain can be achieved by three independent segment coordination such as

• Information system
• Logistics Network
• Financial trade off’s

Author (Christine Harland 2003) describes the increasing complexity in supply networks. In growing market, issues can arise due to various reasons. Following table illustrates few origins of issue

Table 3: Increasing Complexity in Supply network Source (Christine Harland 2003)

Design of supply network can be approached as stages, Production, Procurement and distribution. Each stage can be scattered across supply network positioned anywhere in the globe as illustrated in fig11 (D.J. Thomas 1996).

Designing and coordinating supply chain for a specific product usually tends to break functional and boundary barriers, resulting as a major issue. Functional boundaries can be deceiving in delivering knowledge thus a clear understanding is hard even for top management (D.J. Thomas 1996).

Supply chain management is a new concept but coordinated planning has a profound history since early 1960 (D.J. Thomas 1996). Since then researchers had focused to integrate planning, scheduling and distribution (D.J. Thomas 1996), some of the early models and their functionality are review later in this chapter as illustrated in tables 7-13.

Inventory Management barrier

Managing Inventory is a vital and significantly increases customer satisfaction and also improves profit. According to (Billington 1992), there are 13 pitfalls in Inventory management.

1. No Supply Chain metrics: Generally it is found that there is no strict performance metrics used to evaluate each entity of the supply chain. Usually individual organizations inside a supply network may have conflicting objectives which tends to reduce overall efficiency. This issue has to be addressed by assessing and orienting supply chain metrics which is governed by customer satisfaction criterion (Billington 1992).
2. Inadequate definition of customer service: Usually customer service does not mean just better delivery time or quality. Many critical details like order cycle time and back order time et., these issues can be omitted by proper understand of customer and standards of expectancy (Billington 1992).
3. Inaccurate Delivery status date: This clerical issue can result in massive impact on total efficiency of the supply chain. It can be resolved by centralized data storage under regular monitor (Billington 1992).
4. Inefficient information systems: These issues mostly resolved with recent developments in Information Technology. Software’s like Enterprise resource planning can help to resolve this issue.
5. Ignoring the impact of uncertainties: In a supply chain there can be different sources for uncertainties as, supplier lead time, raw material quality, process lead time, Transportation and fluctuating market etc., Implementation of Just-In-Time (PULL System) can help to resolve these issues as this system monitors uncertainties closely and react immediately (Billington 1992).
6. Simplistic inventory stocking policies: This issue can be resolved with efficient safety stock policies (Billington 1992).
7. Discrimination against internal customers: This is caused when Work in Progress goods are delivered and handled with your supplier unlike finished products to ultimate customer (Billington 1992).
8. Poor coordination: as mentioned earlier in this research, harmonic network coordination is a fundamental entity of supply chain. Better coordination can be achieved by effective Supplier relationship management
9. Incorrect assessment of Inventory costs: Occurrence of this issue is generally by omitting few inventory maintenance cost while formulating supply chain, usually

An effective supply chain design helps in identifying best, Location and distribution centres, Plant Capacity, Market access and planning.